As part of my 2020 personal reading plan, I read The Intelligent Investor. Overall, although somewhat dated, the book provided a lot of insightful and still relevant investing advice. A long read, clocking in at 578 pages including the appendices, but not the endnotes, it’s a long read, but well worth the time spent. As I continue to read more books, I’ll be able to form a better opinion on how good this book is, but intuitively what Graham and Zweig talk about makes a lot of sense to me. In the book he says either you’ll “get it” in 5 minutes or you won’t get it at all.
The book was originally published by Benjamin Graham in 1949. Graham’s latest edition was published in 1973. The latest version of the text, from 2006, was revised by Jason Zweig, an investing and personal finance columnist for the Wall Street Journal. Warren Buffet wrote the preface, the main text is written by Graham, and there is commentary in the bottom of the pages by Jason Zweig as well as a commentary chapter by Zweig after each of Graham’s chapters. Zweig’s commentary brings updated examples of newer companies/bubbles, a look back at how Graham’s advice turned out, and more modern information on currently available investments and how they related to those available in Graham’s day.
- Decide whether you are an “enterprising” or “defensive” investor. If defensive, diversify broadly and use dollar cost averaging. If enterprising, ensure you thoroughly read at least the past 4 quarterly reports and past 5 years of annual reports of every stock you consider investing in. Annual/Quarterly reports are available through the SEC. While reading the reports, you have to be on the lookout for hidden debt, non-standard accounting practices, what the leadership of the company is doing, and be able to determine how the stock should be valued. It sounds like becoming proficient in security analysis is necessary.
- When purchasing a company, always have a substantial margin of safety and ensure you will never lose money. An example of this is purchasing a company which has more assets in hand minus liabilities than the current value of the stock. This is one of Buffet’s favorite chapters in the book.
- It’s important that the company have a longstanding history of offering and increasing dividends over time. Dividends are how you should expect the company to provide a return on your investment. If a company claims to reinvest dividends in growth, they’re telling you they know how to manage your money better than you.
- Avoid trying to time the market and rather ensure you’re making a sound investment when you’re purchasing a company.
- Unsexy companies can be great investments, while popular companies can fall hard in a downturn.
- For the defensive investor, they should not purchase stocks with a P/E ratio above 20 averaged over the last 7 years or 25 averaged over the last 12 months. They should also ensure the company has an adequate financial position.
- Be sure to control brokerage costs, ownership costs (annual expesnes), real return expectations, risk, and tax bills.
- For most investors who won’t spend the equivalent of a full time job researching stocks, it’s better to take a defensive approach and invest in broad market index funds and use dollar cost averaging to even out the highs and lows and diversify.
- Many students of Graham have had great investing results, with many of them averaging 20% returns each year. His students invest in different companies and in different styles, but Zweig notes by following Graham’s principles they invest in superior companies.
Investment vs. Speculation
Understanding the difference between investment and speculation is important and the book offers a few pieces of advice to manage this.
- Investment vs. Speculation should be kept in separate accounts.
- Graham says if you must speculate to keep it under 10% of your total funds.
- It can benefit Wall Street more than you for you to speculate and buy investment “formulas”. As soon as any speculation methodology becomes popular, it inherently loses its advantage.
Defensive vs. Enterprising investor
- The defensive investor
- Someone who doesn’t want to invest the extensive time required to become an enterprising investor.
- Must accept an average return.
- The enterprising investor
- Can achieve greater returns, but must spend the time to intelligently and thoroughly research and evaluate stocks.
Chapter 8, “The Investor and Market Fluctuations” is one of Warren Buffet’s favorite chapters. Graham calls the fluctuating stock market pricing Mr. Market. He describes that the prices in the market will go up and down, but you should not immediately react to these price changes unless something fundamentally changes in the company you invested in. If you do, you are a speculator. While some people can make money by speculating, it’s not wise advice for the general public to attempt this endeavor.
With millions of people haggling over stock prices, the prices can become grossly under or over valued. Many examples are provided throughout the book where the stock price of a company was soaring, even though the company was not making any money, and in the end the stock price crashed.
Furthermore, anyone who invests in the stock market should expect to see volatility in their portfolio. If you invest, Graham describes, you must accept the probability that your holdings could increase 50% from their low point and decrease 33% from their high point in the next 5 years. If you can’t accept this, you shouldn’t call yourself an investor. Fluctuations across months do not make you “richer” or “poorer”. Just because a stock price went up or down, you should not use that as the only indicator as to whether to buy or sell, but rather look at the business value as a whole.
For investing in bonds, there’s a few precautions advised.
- Only invest in high grade bonds, e.g. U.S Government and highly rated corporations.
- Manage interest rate risk by investing in ~7 year or less bonds.
- Limit the price you are willing to pay
- Diversification is important in bonds just as it is stocks, and for this, index funds can be useful.
Where to buy the book
Buying on Amazon through the referral link helps support this blog. You may also be able to find it at your local library for free.